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How Are Mutual Fund Returns Calculated

  • Jan 11, 2024

Looking for long-term financial growth? Mutual funds are a popular choice. But to truly assess their success, it is essential to possess a comprehensive understanding of mutual fund returns.

Once you have calculated these returns, you can effectively monitor the growth of your investments during a designated time frame. Through a detailed examination of these figures, you can evaluate the efficiency of your investment approach and strategically plan for the future. Jump into this article to learn details about the process of calculating the returns from your mutual fund investments.

Understanding Mutual Fund Returns

Before you understand the processes of calculating mutual fund returns, learn a little about what returns in mutual funds. One crucial aspect that measures the performance of your mutual fund investments over a specific time frame is the returns. Determining the profits and losses associated with your mutual fund investments hinges on the returns. Investors are allowed to calculate their mutual fund returns on a monthly, annual, and quarterly basis.

Mutual Fund Return Calculation

Once you learn how to calculate mutual fund return, you can gain varied perspectives about your investment performance. Some methods for calculating your returns include:

1.   Absolute Returns

The concept of absolute returns refers to the overall percentage change in a mutual fund's value over a designated time frame. This calculation is simple and does not consider time or compounding factors. All you need to determine absolute returns are the mutual fund's initial and current Net Asset Values (NAV). The NAV represents the cost of one unit of the fund.

The formula for absolute returns is as follows:

Absolute Return = (Current NAV - Initial NAV) / Initial NAV × 100

2.   Annualised Return

When considering investments held for less than a year, Absolute Returns are a handy tool for calculating returns. However, the Simple Annualised Return (SAR) is the preferred measure to analyse your returns when you have kept your investments for 12 months.

]The SAR is calculated from the absolute return value using the formula:

SAR = [(1 Absolute Rate of Return) ^ (365/number of days)] – 1.

3.   The CAGR

The CAGR is another method for calculating mutual fund returns. This approach considers the principal amount along with the interest earnings on both the principal and interest itself.

It takes into account the time value of money. Thus, it provides a more precise idea of a mutual fund's profitability compared to absolute returns. Also, it allows you to assess your returns’ potential volatility over a specific period. This method offers valuable insights for investors.

To determine the CAGR, use this handy formula:

CAGR = {[(Present NAV / Initial NAV) ^ (1 / Number of years)] - 1} × 100.

4.   Extended Internal Rate of Return

The XIRR approach looks into the exact timing and amount of cash flowing in and out of mutual funds. It goes beyond the initial investment and considers subsequent contributions and withdrawals.

Since the XIRR takes into account all cash movements, This method provides a more precise understanding of a mutual fund's returns. The varying durations of each instalment in SIPs make it challenging to calculate returns.

This presents a challenge when using traditional methods. Fortunately, XIRR can be utilised to calculate the internal rate of return accurately while considering multiple cash flows.

Investing Modes for a Mutual Fund Return

You can invest in one of the following ways to get a mutual fund return:

Lumpsum Investment

The lump sum type of investment only requires a one-time contribution of a hefty amount, making it a convenient choice for someone with a lot of capital. However, investing a chunk of funds at a time comes with higher risks. Usually, experts recommend choosing SIPs over the lumpsum method of mutual fund investments.

Systematic Investment Returns

By setting up a Systematic Investment Plan, or SIP, you give your bank the authority to withdraw a consistent amount from your monthly savings account and put it towards a chosen mutual fund policy. This convenient method removes the pressure to time the market, as you will acquire mutual fund units regularly. With SIP investments, compounded returns will work in your favour.

Wrapping up

If you want to avoid manually calculating mutual fund returns, you can use an online calculator. These tools are ideal for figuring out your returns accurately without errors.

Team Sharekhan
by Team Sharekhan

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